Photo by Daniel Thomas

Marcia Bryan knows firsthand the damage that can be wrought by a payday loan cycle.

Bryan moved from Jamaica to Canada with her mother in 1981, when she was 18. Her mom thought it would be a better place for them to make a life. Years later, at a time when Bryan was helping her teenage sister back in Jamaica pay for school, the Mississauga resident found herself short of funds required for basic necessities like rent and utilities. Despite having a job running a food catering business, there was no way she could see to make it work. Due to a lack of options, Bryan ended up taking out a payday loan.

She lives at Dundas and Hurontario, right across the street from a payday loan business. Her neighbourhood is full of them. What started as an initial loan of $2,700 to cover some business expenses quickly ballooned to over $12,000 as she took out subsequent loans to help with servicing the high repayment costs of her first. One loan turned into two, which eventually turned into seven.

“You don’t read the fine print when you are desperate,” Bryan, a mom of two adult daughters and grandmother to two children, says. “And these agencies can sense your desperation. I was paying over $700 per month for several months and was barely making a dent against the loan.”

Bryan is not alone. Rising interest rates have dominated Canadian headlines for months now. But the five to 6.5 percent rate that the average consumer is now paying on their mortgage is tiny compared to the exorbitant 35 percent interest rate that the two million people who take out payday loans in Canada each year are currently paying.

A payday loan is a short-term, high-interest, unsecured loan that is intended to bridge the borrower’s gap between paycheques. These loans are usually for small amounts, and the repayment is expected to be made in full on the borrower’s next payday.

Without credit history, and often without adequate supports, newcomers can be especially vulnerable to payday lenders. A positive credit history, of course, is a prerequisite for obtaining credit cards, loans, and mortgages. Without a credit score, newcomers may face challenges in accessing these essential financial tools, making goals like home ownership and basic needs like renting a place next to impossible. People rebuilding their lives need cash to do so, and often, there’s no other choice.

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The payday loan industry is relatively new when compared to traditional lending institutions, having only emerged in Canada in the mid-1990s. Today there are about 1,400 payday loan locations across Canada. Big players in the industry include Money Mart, iCash, and Cash Money. For a sector that has only been in operation for 30 years, it has wreaked significant havoc. A study of 2,700 Ontarians who declared bankruptcy in 2022, conducted by Hoyes, Michalos and Associates, showed that over half of insolvencies involved payday loans. Just 10 years earlier, in 2012, only 21 percent of insolvencies included these loans.

Payday lenders would have us believe that they are filling a need in the market by providing loans to Canadians who otherwise wouldn’t be able to access those funds. The reality is that the very nature of payday loans, with their high rates and fee structure, often leads borrowers to being trapped in what has been coined as a payday loan cycle. In that same 2022 study, only a quarter of those loan recipients stopped at one transaction; 74 percent took out at least two loans, with seven percent taking out more than 10 loans.

Stats on how many newcomers seek these loans aren’t easily available, but it stands to reason that anyone without a strong credit score is susceptible to these predatory lending practices. Studies have shown that these loans are most common among vulnerable communities, and that includes newcomers, according to the Association of Community Organizations for Reform Now (ACORN).

In 2022, a record-breaking year for Canadian immigration, 437, 180 people made Canada their new home, and levels are going to continue to be strong for the foreseeable future. This means something needs to be done now to correct this problem before it inevitably gets worse.

Elizabeth Mulholland, CEO of Prosper Canada, a national charity dedicated to expanding economic opportunity for financially vulnerable Canadians, speaks to some of the unique challenges facing newcomers as they create new lives in Canada. She says that while many newcomers are savvy with money in their country of origin, the fact that Canada’s financial landscape is often so different makes it challenging to navigate. “Lack of a Canadian credit score, language barriers, the absence of mainstream lending alternatives in their communities—all of these factors may lead newcomers to opt for payday loans due to the perceived simplicity and accessibility of these services,” Mulholland says.

Payday loan providers know that new immigrants may have limited options in securing credit and are quite strategic in their outreach efforts with this demographic. Key tactics include an emphasis on promoting their services as inclusive and accessible to everyone, regardless of credit history or immigration status. Advertisements often highlight the speed at which borrowers can access funds. For newcomers facing immediate needs, the promise of quick cash is an attractive selling point. And these funds are often only a click away.

“Payday lenders are incredibly savvy with their marketing, and they can get a significant foothold in lower-income communities where mainstream lenders and credit unions have pulled out,” Mulholland says. She says people in these communities often have bad experiences with bigger lenders. Once, a woman told her that when she went to the bank to cash a government subsidy cheque, she overheard the teller say, “It must be nice to collect welfare all day while the rest of us work.” In comparison, payday loan providers are generally fast, discreet, polite, and treat their customers with dignity. “It’s incumbent on financial institutions to demonstrate this same level of respect,” Mulholland says.

While payday loan providers often make their clientele feel respected in the beginning, when it comes to collecting on their loans, the kid gloves come off. In the event of a missed payment, loan providers will attempt to withdraw the funds directly from the person’s bank account. If there are not sufficient funds to cover the payment, they will try again with a smaller amount. This can result in incurring additional NSF fees. If they fail to recoup their loan by garnishing someone’s bank account, the next steps escalate to include engaging a collection agency (which will have a negative effect on their credit score) or potentially going to small claims court to garnish their wages. This means any efforts newcomers with payday loans make to get ahead and build stable lives can be easily and repeatedly thwarted, keeping them trapped in a cycle that compounds other barriers they may face.

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After months of consistent loan payments that failed to make any real progress on her overall amount owing, Bryan knew it was time to make a change. Between 2018 and 2022, she worked on repaying her loans and never missed a payment. Still, due to the loans’ high interest rates and short repayment periods, the principal remained pretty much the same.

“It was such a stressful time,” Bryan says. “I was paying $575 every month for a $400 payday loan, and then would end up borrowing more because I was always short of money. It was truly a vicious cycle.” She eventually connected with a debt consolidation agency that was able to work with her on combining her loans into a more manageable payment cadence. Doing so helped to bring her monthly payments from $575 per month down to $145 per month—and she is actually making progress now and will be free of this debt in the next two years. Credit Counselling Canada is one such agency that has helped hundreds of thousands of Canadians to pay off their debt.

Payday loans may be quick and easy, but given the high costs and risks associated with them, it is advisable to explore other options. Or, as Bryan advises, “Run. Don’t do it. It’s a trap.”

There are various alternatives to payday loans, offering more sustainable and affordable solutions. Credit unions, with their community focused initiatives, may be more willing to work with newcomers. Microfinance institutions, such as Windmill Microlending, specialize in offering small loans to people with low or no credit history. These loans are designed to help people build credit responsibly. Several banks, including TD, RBC, and CIBC, now provide newcomer-specific financing options, too.

Government assistance programs and social services also offer financial support or resources. These programs may include income support, housing assistance, and employment services. Some employers may provide salary advances or assistance programs to help employees facing unexpected expenses also.

For those looking to establish or rebuild their credit history, secured credit cards can be a valuable option. Making timely payments on these cards allows newcomers to build a positive credit record, paving the way for more affordable credit options in the future. Another option to consider is exploring credit-builder loans. With these loans, borrowers make small monthly payments, and the loan amount is typically held in a savings account until the loan is fully repaid. Considering these alternatives ensures a more secure path than relying on payday loans.

Though it can feel like a lot to ask, prompt payments of bills like rent and utilities also have a significant positive impact on one’s credit score—but only if the landlord or utility company reports it to a credit bureau. For those who already have a credit card, keeping balances low relative to the credit limit helps, too. High credit card balances can have a detrimental effect on credit scores. By incorporating these practices, newcomers can steadily build a credit history in Canada.

Financial literacy is a critical component of building a new life in Canada. It enhances a newcomer’s ability to participate in the economy, contribute to their communities, and build a stable and fulfilling life. New immigrants may be unfamiliar with the Canadian financial system, including banking procedures, credit systems, and regulations. Financial literacy education helps people navigate and understand these aspects, empowering them to make informed decisions in Canada. Prosper Canada has several good resources, including My Money in Canada, which provides plain-language information and online modules. The Government of Canada has free financial literacy programming, and the Centre for Newcomers in Calgary also provides free financial coaching for new Canadians.

Some of the key demands that ACORN is championing include the creation of a federally funded Fair Credit Benefit, which would be a grant or emergency fund available from the government, and supporting the provision of basic banking services at post offices.

Financial literacy training and coaching services can go far toward helping newcomers to make informed decisions with their money in a Canadian context. As Canada makes plans to boost immigration numbers in the coming years, it is important for newcomers, and those working with them, to consider these options. For a group already grappling with the challenges of resettlement, falling prey to the payday loan cycle can be particularly detrimental, jeopardizing their well-being and ultimately, their ability to build a better life in Canada.

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While the rising inflation that was widely reported in the past year is finally cooling, the bottom line is that the cost of living in Canada is high, and ways to build credit aren’t equally accessible to all. Payday lenders assert their role in addressing a gap in the market by offering financial assistance to people encountering systemic barriers to fair credit access. However, their approach is ineffective, exacerbating challenges for the vulnerable people they purport to aid. These systemic barriers are the real root issue.

“Some people turn to payday loans because they have a temporary income-expense gap that they need to address,” Mulholland says. “However, for people who are turning to payday loan providers for basic recurring expenses, like buying groceries or paying rent, the fact that they are placed in this no-win situation means we need to better look at our welfare and disability support programs.” These income support programs should be adequate to an individual’s basic needs, she says. “If not, we’re forcing people into the wide-open arms of these payday loan predators.”

Having learned about the dark side of the payday loan industry the hard way, Bryan has since joined ACORN to fight for change. She is eager to see further government intervention in the industry. “My experience opened my eyes to the incredible injustice out there,” she says. “People need a voice, and ACORN is that voice.”

Thanks in part to the efforts of organizations like Prosper Canada and ACORN, the federal government has recently introduced some new measures to address these lending practices, including reducing the “criminal” rate of interest from 47 percent to 35 percent annual percentage rate (APR) and capping lending fees at $14 per $100 borrowed. Despite this, there is still a long way to go toward providing Canadians with a fair alternative to payday loan providers.

As Canada continues to welcome newcomers, it is essential to empower them with the knowledge and resources necessary for financial well-being. Payday loan providers’ destructive practices highlight the urgent need for comprehensive solutions, involving collaboration between government agencies, financial institutions, and nonprofit organizations. Regulating bodies, and the financial services industry at large, both have significant roles to play in levelling the playing field. By understanding the challenges faced by newcomers, addressing systemic issues, and promoting financial education, Canada can pave the way for a more inclusive and equitable future for all.